Under pressure, Bush stops adding to US petroleum reserve

Faced with a veto-proof congressional mandate to stop adding oil to America's emergency reserve, President Bush is closing the spigot. But hopes that the move would lower oil prices have so far failed to materialize.

On Friday, oil closed over $126 a barrel, up more than $2.50. Gasoline prices also hit a record Friday – $3.79 a gallon, according to the AAA car club.

Energy analysts say the action won't have any impact on prices.

"It's a drop in the ocean," says Mike Fitzpatrick of MF Global, a commodities trading company in New York. "I guess every barrel helps at this point, but it probably won't even translate into a drop of a penny or two."

The president's decision means that some 66,000 barrels of oil per day that normally would be added to the 703 million-barrel Strategic Petroleum Reserve (SPR) in Texas and Louisiana will be sold instead to oil companies.

The issue of filling the SPR had become a political football in recent weeks. President Bush wanted to continue filling the SPR with another 24 million barrels of oil. However, the major presidential candidates – Sens. John McCain, Hillary Rodham Clinton, and Barack Obama – were all opposed. On Tuesday, Congress passed legislation mandating the president immediately halt adding to the oil reserve.

"Congress is desperate; they know people are mad," says Phil Flynn of Alaron Trading in Chicago.

On Friday, the Department of Energy announced it would not sign new contracts to continue filling the SPR.

Some energy analysts think the move can be viewed as a symbolic gesture to align federal policy with the sacrifices that ordinary Americans are making. "From the perspective of the American consumer, who is struggling week after week to fill the gas tank, it is bothersome to be competing for the same resources," says Geoff Sundstrom of AAA in Heathrow, Fla. "When we are telling people to remove the golf clubs from the back of the SUV, then we all need to get on board or these prices will never come down."

Yet other energy analysts questioned whether the government should keep adding to the SPR with prices soaring. "It seems reasonable to halt adding oil when prices are so high," says Tim Considine, who has done a study on the SPR and is a professor at Penn State University. "But I don't think the price of oil is going to drop. It's too small an amount to really matter."

Even without the congressional action, it was likely that the government was going to have cut back on adding oil to the SPR because it was nearly full. In 2005, Congress authorized increasing the size of the SPR to 1 billion barrels. But that underground storage facility won't be ready for at least eight years, says Jeremy Cusimano, an economist for the Petroleum Reserves, part of the Energy Department, in Washington. In addition, Congress has yet to provide significant funding for the facility, he adds.

Although the Energy Department has contracts to receive oil through the end of June, it will defer those contracts, says Mr. Cusimano. "But ships on the water will not be diverted."

On the day the Energy Department was making its announcement, President Bush met with Saudi leaders to seek an expansion of oil supplies. According to news reports, the Saudis had already increased oil production by 300,000 barrels of oil per day. This will take Saudi production back to early 2006 levels, wrote Jennifer Gordon of Deutsche Bank securities in a memo to clients on Friday.

She noted that much of the additional Saudi production is on its way to the US, including 16 million barrels of crude that was sold earlier and will arrive in the next two weeks. The additional oil, she calculated, could significantly increase inventories and possibly bring down the oil price.

However, Mr. Fitzpatrick wonders if the Saudi move may have the reverse affect. "It may show how little spare capacity they really have," he says.

This week some analysts have increased their estimate for the price of oil. Goldman Sachs estimated oil prices would hit around $140 a barrel later this year. Mr. Fitzpatrick is estimating it will move to $138 a barrel before September.